The Hyderabad bench of the Income Tax Appellate Tribunal (ITAT) has held that expenditure incurred for construction of a new facility and subsequently abandoned at work-in-progress stage is allowable as Revenue Expenditure.
The revenue challenged the order of the Commissioner of Income Tax (Appeals)-4, Hyderabad. Omega Shelters Private Limited, the assessee is a company engaged in the business of real estate development and construction. It filed its return of income on 15.10.2020 declaring nil income, after setting off brought forward losses of Rs.3,43,74,506. The AO completed the assessment u/s. 143(3) on 27.03.2013 determining the total income of the assessee at Rs. 8,22,43,320/- by computing.
The AO noted from point no.10 of the notes on accounts that during the year under consideration the assessee company surrendered the ‘Neighborhood apartments’ project and the total cost incurred aggregating to Rs.7,57,24,129/- had been considered by the assessee company as a sunk cost and debited to profit and loss account. The said expenditure of Rs.7,57,24129/- incurred by the assessee on the “Neighborhood Apartments” project was claimed against the gross profit of Rs.11,75,65,798/- earned by the assessee on the “Neighborhood Villas” project thereby reducing the profit from “Neighborhood Villas” project by Rs. 7,57,24,129/-.
The AO was not satisfied with the explanation given by the assessee and made an addition of the amount of Rs.7,57,24,129/- to the total income of the assessee. The CIT(A) deleted the addition on the ground that the expenditure incurred on the abandoned project called Neighborhood Apartments is revenue expenditure and not capital expenditure
A Coram comprising of Shri Rama Kanta Panda, Accountant Member and Shri Laliet Kumar, Judicial Member observed that the assessee abandoned the project due to commercial expediency and in terms surrendered the same in favour of the land owner M/s. Fortune Construction Pvt. Ltd. Further, the amount of Rs. 13 crores refunded to the assessee towards security deposits is out of the security deposit of Rs. 80 crores as of 31.03.2009 which reduce to Rs.67 crores as on 31.03.2010.
It was observed that in the case of Chemplast Sanmar Ltd (supra) the court held that” where the assessee company set up a new project which was subsequently abandoned, since the new project was managed from common funds, control over all business units was in hands of the assessee and there was the unity of control, it could not be said that pre-operative expenditure incurred by the assessee was on a new line of business, thus, same was to be allowed as revenue expenditure.”
The Tribunal upheld the order of the CIT(A) in deleting the addition and dismissed the appeals filed by the revenue.
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